Inside Health

ON THE CONTRARY; The Hidden Price Tag For Health Care

By DANIEL AKST

Published: December 12, 2004

ELIOT SPITZER? The Sarbanes-Oxley law? Never mind them. What should really be keeping executives awake at night is something that looks much more mundane: the upward trajectory of American health care spending.

Mr. Spitzer, the New York attorney general (and candidate for governor), is the scourge of corporate corruption, and Sarbanes-Oxley is the tough new federal accounting measure. Why should medical costs make corporate America squirm more? Managed care, after all, has helped to hold down spending, and companies are passing along more costs to workers. Rising health care spending may be a problem, but not for investors and executives, right?

Wrong. A recent study found that the growth rate for health care spending, excluding Medicare, had stopped declining and appeared to be leveling off at 7.5 percent annually. Though that is smaller than the figure for some past years, it could cripple the economy soon enough, and my bet is that spending growth will resume its upward spiral before long --especially if the country finds a way to cover the 45 million Americans who now lack insurance.

The absence of more widespread alarm is a symptom of the cost-shifting and confusion that mask the seriousness of the disease. Health care is already consuming 15 percent of our national output, yet Americans are no healthier than people in comparable nations that spend much less. And nothing on the horizon suggests these costs will be constrained soon.

Business should be worried because, no matter who writes the checks, we all pay the bill, and the miracle of compounding means that it will soon be staggering. Uwe E. Reinhardt, an economics professor at Princeton, has said that health care is expected to consume 28 percent of gross domestic product by 2030 -- and as much as 46 percent by mid-century.

Some people have argued that advances in medical technology will eventually bail us out. Instead, those advances are likely to drive up costs by giving us more on which to spend, just as they have in the past. Other factors in this spending growth are the aging of the population, not to mention our national habit of overeating and underexercising. The impact will be amplified by the huge cost-shifting that characterizes our system. The cost of hospital care for the uninsured, for instance, is quietly built into hospital prices paid by the insured -- who in turn pass along part of their costs to Uncle Sam (through tax deductions).

New tax-sheltered health savings accounts, coupled with high-deductible insurance policies, are supposed to help by letting people set aside their own money for the first few thousand dollars of medical bills each year. But don't expect miracles from these new plans. People with chronic ailments probably won't choose them, resulting mainly in a tax giveaway to the healthy, affluent Americans who will. Besides, as Martin S. Gaynor, an economist at Carnegie Mellon University, observes, relatively few Americans account for the bulk of all spending on health care. In one study, 10 percent of the people accounted for 69 percent of the cost. The implication is that helping most people to economize on routine medical expenses probably won't help much.

The short-term impact of rising health care costs is cushioned by the tax breaks that come with medical coverage. Health insurance benefits are attractive to both employers and workers because they save both parties money, compared with an equivalent amount of regular wages. But by picking up part of the bill, the government is merely passing the buck to other taxpayers -- and masking the costs, while encouraging higher medical spending.

Eliminating the tax deduction for traditional health coverage is the first step out of this morass. One advocate of such a move is Martin S. Feldstein, the Harvard economics professor and president of the National Bureau of Economic Research, who says it would increase federal income tax collections by $120 billion a year. In my view, businesses should stop providing health insurance altogether. It's a crazy, inefficient system that limits labor mobility and puts American firms at a big disadvantage. The $1,400 a car that General Motors spends on health care is one reason that Ontario, which has government health insurance, may soon surpass Michigan in automobile manufacturing.

BEYOND that, it's time for business to mobilize its army of lobbyists for a national system of coverage that is comprehensive and competitive, and contains strong incentives not to spend. Like car insurance, it has to be mandatory -- for the healthy as well as the sick -- but left to individuals to buy. Through tax credits or other means, the government can provide it for those who can't afford it. We will also need a big national campaign to discourage unhealthy styles of living, which account for so much medical expenditure. And we will need coordinated deployment of information technology to find out what kinds of medical spending are worthwhile and what kinds aren't.

Spending would probably still grow, but imagine if we could bring down the overall level to 12 percent of G.D.P. -- just halfway toward the roughly 9 percent that is the average in other advanced countries. If that happened tomorrow -- we're just imagining, remember -- we'd enjoy an annual windfall of more than $300 billion. I can't think of a better prescription for the economy.

Photo: For each car that rolls off its production lines, General Motors spends $1,400 in employee medical costs. (Photo by Norm Betts/Bloomberg News)